Things Every Business Owner Should Know
Things Every Business Owner Should Know...
Some business sites report that 40% of small business owners say that bookkeeping and taxes are the worst part of owning a business. It's not that surprising because as a business owner, there are so many details that need your attention. These details may include: selling and marketing your goods or services, knowing your numbers and understanding what they mean. For this week’s article, we discuss some basic accounting that is important info you should know.
Firstly, what is accounting? It’s the act of recording, classifying, summarizing and analyzing the financial dealings of a business. Some even say that accounting is the language of business.
Why is accounting important for small businesses? Accounting provides various bits of information about business operations that may allow business owners to make informed decisions about tax planning, investment or business decisions to among other reasons.
Generally there are two types of accounting users: internal uses such as the owner, manager and employees; and external users such as creditors, investors, and customers as well as the IRS and other taxing authorities.
Bookkeeping allows you to manage your business resources such as where is the your income/money coming and going. This may include: revenue and expenses, cash, inventory, sales, accounts receivable & payable and more. Bookkeeping is a priority because the data is so valuable to you, the business owner. With accurate bookkeeping, you can determine if you are making or losing money, pricing your goods or services accurately, provide you with short and long term cash flow.
If bookkeeping is not your area of expertise, we suggest contacting a professional to help you balance and maintain good records.
There are two main bookkeeping systems: single entry and double entry. Single entry keeps track of what goes in and what goes out of the account, it’s recommended for very small businesses. The double entry system is more complex as it allows you to track the debit and credit for each business transaction.
Income and expenses, simply stated, what are they to a business? Income is the money (revenue) received for work that may come into a business through selling products or services and also through investments. Expenses are the costs a business incurs through its operations.
Assets are what a business owns. They are usually purchased to increase the value of a business and can assist with cash flow. There are two types of assets: current and fixed. Current include your accounts receivable, inventory and any prepaid expenses while fixed assets are property and equipment that is owned by your business but not intended for sale that maybe used frequently such as buildings or machines.
Liabilities and Equity, now we are getting more detailed with our overview. A liability is the debt or obligation of a business; they arise during the operation of a business and may include bank debt, accounts payable or business loan. Equity is the value of an asset less the value of the liabilities asset or Equity = Assets – Liabilities.
Balance Sheet, what is it? It’s a snapshot of your business from a financial perspective at a specific point in time. It highlights what is owned and what is owed. Here’s a bit of math: Assets = Liabilities + Equity. An important rule for accounting with this equation is that the left side (assets) should always equal the right side (liabilities + equity); if not, there’s a mistake.
Income Statement is an important financial document used to track the sales and expenses during a specific period. It’s also called the Profit and Loss or P&L statement. With the information on this statement, a business owner is able to determine if their business if profitable. The statements show your earned income and the incurred expenses. Income statements present your sales and expenses over a period of time, not a fixed point in time like a balance sheet.
Net profit is the difference between your income and your expenses or as we like to say, the bottom line. Your net profit is the money leftover after all of your expenses are accounted for and subtracted from the sales of your business. By aligning the sales of a business with its expenses, it shows the profitability of a business and the amount of earnings made over a period of time.
More Math! (Income – cost of sales = gross margin) – fixed operating expenses = net profit.
There are certainly more topics to discuss and we’ll continue this discussion soon and talk briefly about cash flow statements and more. However, if all of this sound confusing to you? Consider outsourcing your accounting function because it allows you time to focus on your business and do what you do best.